FAC2602

Open Rubric
 LEARNING OUTCOMES
After studying this learning unit, you should be able to:

• Familiarize yourself with the objectives and key principles taught with regard to
joint ventures, joint operations, and joint arrangements.
• Apply these principles in a group scenario.
• Able to identify a joint arrangement in a group context.
• Able to explain the differences between a joint operation and a joint venture.
• Account for intragroup transactions between the parent and the joint venture.
• Prepare and present group financial statements by applying the provisions of
IFRS 11 and IAS 28.

OVERVIEW

12.1 KEY DEFINITIONS ............................................................................................... 3

12.2 JOINT VENTURES, OPERATIONS AND ARRANGEMENTS .............................. 3
12.3 ACCOUNTING USING THE EQUITY METHOD .................................................. 4
12.4 APPLICATION OF THE EQUITY METHOD ......................................................... 6
12.5 SUMMARY OF KEY PRINCIPLES ..................................................................... 11
12.6 PRACTICE QUESTION ...................................................................................... 12
SELF ASSESSMENT .................................................................................................... 17

KEY CONCEPTS
• Joint Ventures vs Joint Operations
• Joint Arrangements
• Joint Control
• Equity Method of Accounting
• Intragroup transactions and preparation of group financial statements

2
ASSESSMENT CRITERIA
After studying this learning unit, you should be able to:
• Distinguish between joint ventures, joint operations, and joint
arrangements.
• Understand when and how to apply the equity method.
• Distinguish between joint control and significant influence.
• Differentiate between an associate, a subsidiary, a joint operation,
a joint venture, and a joint arrangement.
• Understand how to account for and record joint ventures, joint
operations, and joint arrangements in a group context.
• Prepare and present consolidated annual financial statements
when a joint interest exists.
• Account for intragroup transactions and record the pro-forma
journal entries for the elimination of the intragroup profit or loss.

2
12.1 KEY DEFINITIONS
IAS 28 – Investment in Associates and Joint Ventures is covered in two learning units.
Learning unit 11 covers investments in associates and learning unit 12 covers joint
arrangements.

The following terms are frequently used in this chapter with the meanings specified:

Equity Method of Accounting – A method of accounting in which an investment is initially

recognized at cost, after which the investment is adjusted for the post-acquisition change
in the investor’s share of the investee’s equity. The profit or loss of the investor includes
its share of the profit or loss of the investee; and the other comprehensive income of the
investor includes its share of other comprehensive income of the investee
(IAS 28.IN7).

Joint Arrangement – An arrangement in which two or more parties have joint control.

Joint Control - This is a contractually agreed sharing of control of an arrangement, which

exists only when decisions about the relevant activities require the unanimous consent of
the parties sharing control.

Joint Operation: A joint operation is a joint arrangement in which the parties that have
joint control of the arrangement have rights to the assets and obligations for the liabilities
relating to the arrangement.

Joint Operator: A party to a joint operation that has joint control of that joint operation.

Joint Venture – A joint arrangement in which the parties that have joint control of the
arrangement have rights to the net assets of the arrangement.

Joint Venturer: A party to a joint venture that has joint control of that joint venture.

12.2 JOINT VENTURES, OPERATIONS AND ARRANGEMENTS

A joint arrangement is an agreement in which two or more parties have joint control, and
has the following characteristics (IFRS 11.5):

• The parties are bound by a contractual arrangement, and

• The contractual arrangement gives two or more of these parties joint control of the
arrangement.

Two types of joint arrangements exist, namely:

• Joint operations
• Joint ventures

3
IFRS 11 requires a party to a joint arrangement to determine the type of joint arrangement
it is involved in by assessing its rights and obligations arising from the arrangement
(IFRS 11.14). The entity’s rights and obligations will be assessed by considering the
structure and legal form, contractual terms as well as other facts and circumstances that
are relevant.

If the investment is found to be a joint operation, the entity will recognise the assets,
liabilities and related revenue and expenses in relation to its interest in accordance with
the IFRS standards applicable to the particular assets, liabilities, revenue, and expenses.

If the interest is found to be a joint venture, the entity will recognise the investment in the
joint venture following the equity method in accordance with IAS 28 - Investments in
Associates and Joint Ventures.

The equity method which is discussed in further detail below requires that the investment
be recognised initially at cost, after which it is adjusted for the venturer’s share of any post-
acquisition changes in net assets.

The treatment of intragroup transactions pertaining to joint ventures is the same as for
associates and is discussed in detail in learning unit 11. Please refer to learning unit 11 for
explanations on the technical concepts.

12.3 ACCOUNTING USING THE EQUITY METHOD

An investment is accounted for using the equity method from the date on which it becomes
a joint venture.

On acquisition of the investment, any difference between the cost of the investment and
the entity’s share of the investee’s equity represents goodwill or a bargain purchase gain.

Goodwill is included in the carrying amount of the investment if the cost paid by the investor
exceeds the portion of equity acquired. Note that goodwill is not a separately recognisable
line item in the group statements and is included in the carrying amount of the investment.

A bargain purchase gain is included in income and is computed as the excess of the
investor’s share of the equity of the investee over the cost of the investment.

On initial recognition, the investment in a joint venture is recognised at cost. The

investment figure is then adjusted upon occurrence of any of the following transactions:

(a) Adjustments made to the investee’s profit or loss for various types of transactions
including depreciation and impairment. The investor’s share of the investee’s profit
or loss is recognised in the investor’s profit or loss.
(b) Distributions received from the investee reduce the carrying amount of the
investment.

4
 (c) Any changes made to the investee’s other comprehensive income (i.e., revaluation
of property, plant, and equipment). The investor’s share of these changes is
recognised in the investor’s other comprehensive income.

Gains and losses resulting from ‘upstream’ and ‘downstream’ transactions between an
entity and its joint ventures are recognised in the group’s financial statements only to the
extent of the external investors’ interests in the joint venture. This is the same approach
applied to subsidiaries where intragroup transactions are eliminated. Only transactions
with external parties need to be reflected in the group statements.

Many of the procedures that are applied in the equity method are similar to the
consolidation procedures covered in learning units 1-9.

Important note:
The equity method involves the inclusion of only the investment in the
joint venture in the consolidated statement of financial position and only
the investor’s share of profit and other comprehensive income in the
consolidated statement of profit or loss and other comprehensive
income.

The joint venture’s individual assets, liabilities, income, and expenses

are NOT separately included in the consolidated financial statements.

If a joint venture uses different accounting policies to those of the investor, adjustments
should be made to ensure that the associate’s or joint venture’s accounting policies
conform to those of the investor when applying the equity method.

A group’s share in a joint venture is represented by the total holding in that joint venture
by the parent and its subsidiaries. The holdings held by other joint ventures within the
group are ignored for this purpose.

If a joint venture has other subsidiaries, associates or joint ventures, the profit or loss, other
comprehensive income and net assets taken into account in applying the equity method
are those recognised in the joint venture’s financial statements (including the joint venture’s
share of the profit or loss, other comprehensive income and net assets of its associates
and joint ventures).

5
12.4 APPLICATION OF THE EQUITY METHOD

In the application of the equity method:

• An analysis of equity is used as a calculation tool.

• Where needed, individual assets of the joint venture can be revalued at acquisition.
• When the cost of the investment exceeds the investor’s share in the fair value of
the net assets of the joint venture at acquisition, the difference is recognised as
goodwill, but it is not recognised as a separate asset. Instead, it is reflected in the
cost of the investment.
• When the investor’s share in the fair value of the net assets of the associate at
acquisition exceeds the cost of the investment, the difference is recognised as a
gain from a bargain purchase.
• Unrealised profits or losses on intragroup transactions are eliminated.

In FAC 2602, we will not cover the accounting of joint operations.

EXAMPLE ON JOINT VENTURES

P Ltd acquired 30% of the shares in JV Ltd on 1 July 2017. The following represents the
condensed statements of P Ltd and JV Ltd, at 30 June 2019:

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR

THE YEAR ENDED 30 JUNE 2019

P Ltd
JV Ltd
Group
R R
Revenue 400 000 275 000
Cost of sales (170 000) (140 000)
Gross profit 230 000 135 000
Dividend received from JV Ltd 15 000 -
Other expenses (40 000) (25 000)
Profit before tax 205 000 110 000
Income tax expense (82 000) (32 000)
PROFIT FOR THE YEAR 123 000 78 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 123 000 78 000

Total comprehensive income attributable to:

Owners’ of the parent 103 000 78 000
Non-controlling interests 20 000 -
123 000 78 000

6
STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2019

Retained earnings
P Ltd Group JV Ltd
R R
Balance at 1 July 2018 84 000 76 000
Changes in equity for 2019
Total comprehensive income for the year
Profit for the year 103 000 78 000
Dividends (65 000) (50 000)
Balance as at 30 June 2019 122 000 104 000

STATEMENTS OF FINANCIAL POSITION FOR THE YEAR ENDED 30 JUNE 2019

P Ltd
JV Ltd
Group
R R
ASSETS
Property, plant, and equipment 300 000 200 000
Investment in JV Ltd (50 000 shares at cost) 100 000 -
Inventory 110 000 170 000
Total assets 510 000 370 000

EQUITY AND LIABILITIES

Share capital (200 000 and 75 000 shares respectively) 100 000 50 000
Retained earnings 122 000 104 000
Non-controlling interests 58 000 -
Creditors 230 000 216 000
Total equity and liabilities 510 000 370 000

Additional information

1. P Ltd acquired its interest of 30% in JV Ltd on 1 July 2017, on which date JV Ltd’s
retained earnings amounted to R35 000. The share capital of JV Ltd amounted to
R50 000 at acquisition. Consider the carrying amount of the assets and liabilities of A
Ltd to be equal to the fair value thereof at the date of acquisition.
2. P Ltd exercises joint control over the financial and operating policy decisions of
JV Ltd in terms of a joint arrangement. The joint arrangement is classified as a joint
venture.

7
 REQUIRED
Draft the consolidated financial statements of the P Ltd Group for the year
ended 30 June 2019 in compliance with the requirements of International
Financial Reporting Standards.

SOLUTION

P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2019

R
Revenue 400 000
Cost of sales (170 000)
Gross profit 230 000
Other expenses (40 000)
Share of profit of joint venture (1)23 400

Profit before tax 213 400

Income tax expense (82 000)
PROFIT FOR THE YEAR 131 400
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 131 400

Total comprehensive income attributable to:

Owners of the parent (131 400 – 20 000 given) 111 400
Non-controlling interests 20 000
131 400
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
30 JUNE 2019
Non-
Share Retained control- Total
Total
capital earnings ling equity
interests
R R R R R
Balance at 1 July 2018 100 000 96 300(4) 196 300 38 000 234 300
Changes in equity for 2019
Total comprehensive income for
111 400 111 400 20 000 131 400
the year
Profit for the year 111 400 111 400 20 000 131 400
Other comprehensive income
Dividends (65 000) (65 000) (65 000)
Balance at 30 June 2019 100 000 *142 700 242 700 58 000 300 700

* 122 000 (P Ltd closing balance) + 20 700 (AOE)

(4) 84 000 + 12 30

8
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2019

R
ASSETS
Non-current assets
Property, plant, and equipment 300 000
Investment in joint venture
120 700
(100 000 + 35 700 – 15 000 (see journals)
420 700
Current assets
Inventory 110 000
Total assets 530 700

EQUITY AND LIABILITIES

Equity attributable to owners of the parent
Share capital 100 000
Retained earnings 142 700
242 700
Non-controlling interests 58 000
Total equity 300 700

Current liabilities 230 000

Total equity and liabilities 530 700

9
Calculations

1. Analysis of owners' equity of JV Ltd

JV Ltd 30%
Total At Since
R R R
At acquisition
Share capital 50 000 15 000
Retained earnings 35 000 10 500
85 000 25 500
Goodwill - 74 500
Consideration and NCI 85 000 100 000

Since acquisition
• To beginning of current year
Retained earnings (76 000 - 35 000) 41 000 12 300(2)
• Current year
Profit for the year 78 000 23 400(1)
Dividends
(50 000) (15 000)
154 000 20 700

2. Pro-forma consolidation journal entries

Dr Cr
R R
Investment in JV Ltd (SFP) 35 700
Share of profit in joint venture (P/L) (1) 23 400
Retained earnings (SCE) (2) 12 300
Accounting for the joint venture according to the equity method

Dividend income (P/L) 15 000

Investment in JV Ltd (SFP) 15 000

10
12. 5 SUMMARY OF KEY PRINCIPLES
CHARACTERISTICS OF JOINT ARRANGEMENTS

• Two or more parties are bound by a contractual arrangement

• A joint arrangement establishes joint control

Joint Operation: Joint Venture:

• Joint operators • Joint venturers
• Joint arrangement • Joint arrangement
• Joint control • Joint control
• Rights to the assets and • Rights to the net assets of the
obligations for the liabilities relating arrangement
to the arrangement • Apply the equity accounting
• Recognise assets and liabilities, method by adjusting the
including those held jointly investment in accordance with
• Recognise its share of revenue IAS 28
and expenses including those • Accounting is similar to
earned and incurred jointly associates
• Out of scope of FAC 2602 • Refer to learning unit 11 for
examples on intragroup
transactions
• In scope for FAC 2602

11
12.6 PRACTICE QUESTION

A Ltd acquired 30% interest in B Ltd for R300 000 on incorporation of B Ltd
(1 January 2019). In terms of a contractual agreement, A Ltd, together with other
operators, exercises joint control over the economic activities of B Ltd. The arrangement
is classified as a joint venture as per the requirements of IFRS 11, Joint Arrangements.
Below are the extracts of the financial statements of A Ltd Group and B Ltd for the year
ended 31 December 2019:
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2019
A Ltd
Group B Ltd
R R
ASSETS
Property, plant, and equipment 1 200 000 650 000
Investment in B Ltd at cost 300 000 -
Inventory 200 000 800 000
Total assets 1 700 000 1 450 000
EQUITY AND LIABILITIES
Share capital 500 000 1 000 000
Retained earnings 800 000 450 000
Non-controlling interests 400 000 -
Total equity and liabilities 1 700 000 1 450 000

CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2019
A Ltd Group B Ltd
R R
Revenue 2 500 000 1 800 000
Cost of sales (1 400 000) (1 100 000)
Gross profit 1 100 000 700 000
Other income 534 000 325 000
Other expenses (120 000) (125 000)
Profit before tax 1 514 000 900 000
Income tax expenses (480 000) (270 000)
PROFIT FOR THE YEAR 1 034 000 630 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1 034 000 630 000
Total comprehensive income attributable to:
Owners of the parent 770 000 630 000
Non-controlling interests 264 000 -
1 034 000 630 000

12
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 2019
A Ltd
Group B Ltd
R R
RETAINED EARNINGS
Balance as at 1 January 2019 150 000 -
Changes in equity for 2019
Total comprehensive income for the year:
– Profit for the year 770 000 630 000
Dividends paid (120 000) (180 000)
Balance as at 31 December 2019 800 000 450 000

Additional information
1. On 1 March 2019, A Ltd Group sold land to the joint venture, B Ltd, at its fair value of
R350 000. The land had a carrying amount of R120 000 in the records of A Ltd
Group.

2. On 1 October 2019, B Ltd sold a plant to A Ltd Group at a profit of R120 000. It is the
entity’s policy to depreciate plant using the straight-line method. At the date of sale,
the remaining useful life of the plant is 5 years. The profit on sale of the plant is
included in other income in the records of B Ltd.

REQUIRED:

a) Prepare the pro forma journal entries to account for the joint venture
in A Ltd Group’s financial statements for the year ended
31 December 2019.

b) Prepare the assets section of the consolidated statement of financial

position of the A Ltd Group as at 31 December 2019.

c) Prepare the consolidated statement of profit or loss and other

comprehensive income for the A Ltd Group for the year ended
31 December 2019.

Your answer must comply with the requirements of International

Financial Reporting Standards.
Comparative figures are not required.

13
SOLUTION

PART A
Dr Cr
R R
J1 Investment in joint venture (630 000 x 30%) 189 000
Share in profit of joint venture 189 000
Accounting for the joint venture’s 30% share in the
profit of B Ltd
J2 Other income (dividend received) (180 000 x 30%) 54 000
Investment in joint venture 54 000
Elimination of intragroup dividend
J3 Other income (profit on sale of land) (P/L) 69 000
Investment in joint venture (SFP) 69 000
Elimination of unrealised profit on intragroup sale of
land ((350 000 – 120 000) x 30%)
J4 Share in profit of joint venture (P/L) 36 000
Property, plant, and equipment (plant) (SFP) 36 000
Elimination of unrealised profit on intragroup sale of
plant (120 000 (given) x 30%)
J5 Accumulated depreciation (SFP) 1 800
Share in profit of joint venture (P/L) 1 800
Accounting for realised portion of profit on sale of plant
through use (36 000 / 5 years x 3/12)

14
PART B

A LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2019
ASSETS R
Non-current assets
Property, plant, and equipment
(1 200 000 – 36 000 (J4) + 1 800 (J5)) 1 165 800
Investment in joint venture (300 000 + 189 000 (J1) – 54 000 (J2) –
69 000 (J3)) 366 000
1 531 800

Current assets
Inventory 200 000
Total assets 1 731 800

EQUITY AND LIABILITIES

Equity attributable to owners’ of the parent
Share capital 500 000
Retained earnings 831 800
1 331 800
Non-controlling interests (given) 400 000
Total equity and liabilities 1 731 800

NOTE:
The question did not require the inclusion of equity and liabilities, but they are provided
for study purposes.

15
PART C

A LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2019
R
Revenue 2 500 000
Cost of sales (1 400 000)
Gross profit 1 100 000
Other income (534 000 – 54 000 (J2) – 69 000 (J3)) 411 000
Share of profit in joint venture (189 000 (J1) – 36 000 (J4) + 1 800 (J5)) 154 800
Other expenses (120 000)
Profit before tax 1 545 800
Income tax expense (480 000)
PROFIT FOR THE YEAR 1 065 800
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1 065 800
Total comprehensive income attributable to:
Owners of the parent (balancing figure: 1 065 800 – 264 000) 801 800
Non-controlling interests (given) 264 000
1 065 800

A LTD GROUP
EXTRACT FROM THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2019
Retained
earnings
R
Balance as at 1 January 2019 150 000
Changes in equity for 2019
Total comprehensive income for the year:
Profit for the year 801 800
Dividends paid (120 000)
Balance as at 31 December 2019 831 800

16
SELF-ASSESSMENT
After studying this learning unit, are you able to:
• Identify a joint venture?
• Understand the concepts of joint control and joint arrangements?
• Understand how and when to apply the equity method?
• Record and disclose an investment according to the equity method
in the financial statements of the investor?
• In the case of intragroup transactions, calculate the percentage of
unrealised profit or loss in inventory or property, plant and
equipment sold?
• Record the pro forma consolidation journals for the elimination of
the intragroup profit or loss?
• Prepare and present the consolidated annual financial statements
when the investment in a joint venture is accounted for according
to the equity method?

17